BlackRock, MSCI Face Congressional Probes for Facilitating China Investments

The world’s largest asset manager and a top stock-market-index compiler are being investigated by a congressional committee for facilitating American investment in Chinese companies the U.S. government has accused of bolstering China’s military and violating human rights.

The House of Representatives’ Select Committee on the Chinese Communist Party notified BlackRock and MSCI on Monday of the probes into their activities, according to letters viewed by The Wall Street Journal.

While the committee doesn’t have lawmaking authority, it does have subpoena powers and has garnered bipartisan support for its initiatives. The goal of the investigation is to gather facts that would inform the U.S.’s China policies, including on American capital flows. 

The panel told the firms that a review of just a sliver of their activities—which aren’t illegal—showed that they are causing Americans to fund more than 60 Chinese companies that U.S. agencies have flagged on security or human-rights grounds.

By routing “massive flows of American capital” to such Chinese entities, the U.S. firms are “exacerbating an already significant national-security threat and undermining American values,” said the letters, signed by the panel’s chairman, Republican Rep. Mike Gallagher of Wisconsin, and its top Democrat, Rep. Raja Krishnamoorthi of Illinois. Across five funds, BlackRock has invested more than $429 million in such Chinese companies, the panel found.

BlackRock manages more than $9 trillion in assets and is entrusted by millions of Americans to invest their savings. The firm said in a statement that it has engaged the committee directly to better understand its concerns. “The majority of our clients’ investments in China are through index funds, and we are one of 16 asset managers currently offering U.S. index funds investing in Chinese companies,” it added.

MSCI selects the securities that make up the indexes many investors use as a basis for their portfolios. There are more than $13 trillion of assets benchmarked to MSCI’s products. In a statement, the firm said it’s reviewing the committee’s inquiry. It has previously said that all of its index decisions are made after consultations with a range of global market participants.

The select committee on China, which was set up this year, is increasingly targeting the role of U.S. companies and financial institutions in fueling the rise of China. Its work exemplifies a shift in thinking in the White House and on Capitol Hill that once supported U.S. business ties with China but now sees some investment as counter to U.S. interests. 

Like the Jan. 6 select committee that investigated the 2021 attack on the Capitol, the China panel aims to build a narrative in a way that is accessible to the public. 

Last week, the Senate made progress on passing potential legislation that would require certain U.S. entities to notify the Treasury Department of investments in sensitive technologies in adversary countries such as China. Lobbying from the business community has so far quashed attempts to review or block such investments.

The China committee in July launched an investigation into U.S. venture-capital firms funding Chinese artificial-intelligence, semiconductor and quantum-computing startups.

The White House and a bipartisan coalition in Congress have deemed such investments especially harmful because of the operational expertise and critical relationships the U.S. venture capitalists offer their targets.

With this latest investigation into BlackRock and MSCI, the panel is broadening its focus by now also scrutinizing asset managers and index compilers. Such firms would typically have little to no direct involvement with the Chinese companies in their portfolios or indexes, but they play a crucial role in directing large sums of Americans’ retirement savings into their coffers. The panel said its review has shown that, “as a direct result of decisions” made by BlackRock and MSCI, Americans have been “unwittingly funding” an array of Chinese companies that operate against the interests of the U.S. 

A representative from the Chinese Embassy in Washington said Monday that “politicizing economic, trade and investment issues runs counter to the principles of market economy.”

Buying shares of Chinese companies has provided big returns in the past for investors. The optics of such investments have shifted, however, as U.S.-China tensions have escalated. 

In 2018, MSCI added domestic Chinese stocks to its widely followed Emerging Markets Index, sending billions of dollars flowing into those companies. The move came after pressure from the Chinese government, the Journal previously reported. 

In addition to its passive funds invested in Chinese companies, two years ago BlackRock raised money for a Chinese mutual fund. That decision drew scrutiny from billionaire investor and political activist

The committee, in its letters, called out BlackRock and MSCI for including in its funds or indexes companies featured on various U.S. government “red flag lists,” such as a Pentagon list of Chinese companies operating in the U.S. that help China’s military and a Department of Homeland Security list of entities involved in human-rights abuses in China’s Xinjiang region. 

It criticized the U.S. firms for investing in or including in indexes companies such as Chinese telecommunications giant ZTE, which the Federal Communications Commission has put on a list of national-security threats, and units of Aviation Industry Corporation China, a state-owned company known as AVIC that makes jet fighters for the People’s Liberation Army.

Representatives from AVIC and ZTE didn’t respond to requests for comment.

In its letters, the committee asked each firm to make a full accounting of the Chinese entities it is investing in or including on indexes, and to report any due diligence it undertakes before doing so.

Write to Kate O’Keeffe at [email protected] and Corrie Driebusch at [email protected]